Why companies and governments need each other

UNDER THE FEUDAL system of the Middle Ages, everybody knew their place, even
if they occasionally overstepped the mark. The peasant owed allegiance to the
squire, the squire to the nobleman and the nobleman to the king. By contrast, since
industrial capitalism has been around, the relationship between companies and
the state has been volatile. The 19th century was an era of laissez-faire, but in the
20th century two world wars required strong state control of the economy, and in
the social democracies that prevailed after 1945 the private sector played a
diminished part, particularly in Europe. When economies were liberalised after
1980, the state retreated again and nationalised industries were returned to the
private sector.

Now three factors are at work that could change the relationship yet again. The first
is the financial crisis of 2007-08, which undermined the argument that free
markets, left alone, would regulate themselves. It has been followed by a long
period of austerity that has made voters angry and boosted support for populist
parties on both left and right. Companies make obvious targets for such popular
anger.

The second factor is the growth of the internet, which has made it much easier for
both companies and the state to gather large amounts of information about
individuals. The state is tempted to take advantage of this corporate knowledge,
largely for policing and anti-terrorism reasons, but also feels the need to regulate
how companies store and use personal data.

The third is the continuing impact of globalisation. This gives multinational firms
more freedom to move around the world, but it also means that Western
companies face competition from many emerging-market titans with state
backing. If rich-world governments hobble their own companies too much, they
may hand market dominance to the champions of the emerging world. That is no
way to create jobs.

There is a fine line between creating an environment in which companies can

flourish, and cosseting businesses so much that they become uncompetitive. The
problem in developed countries has not, in recent years, been governments
unwillingness to help; it has been a lack of strategic vision. There has been too
much micromanagement to encourage particular industries and particular
behaviour.
Dont chop and change

Time and again, business leaders say that

what they want most is consistency. When
they make a 15-year investment, they want
to be sure that the taxes and regulations at
the end of that period will still be the same
as at the start. Fiddling with the rules leads
to uncertainty, which discourages
investment.

The endless tinkering by politicians also

leads to a lobbying arms race in which the winners are not the best companies but
those with the best political connections. Once caught up in this race, businesses
find it hard to quit. And the public comes to believe that the system is rigged in
favour of insiders, increasing its resentment of companies. To reduce the need for
lobbying, governments should establish a sound basic framework of simple taxes
without loopholes, as well as regulation that concentrates on the big picture.

On the tax front, it seems unlikely that the profits levy will disappear altogether in
the foreseeable future, but international competition and the increasing popularity
of alternative corporate structures such as partnerships are likely to exert
downward pressure on tax rates. Companies will always try to manage their affairs
so as to minimise their tax bills, but at a time when voters are feeling the pinch,
sensible businesses will realise that if they overdo the tax avoidance they might
damage their reputation. Governments should focus more on income and
consumption taxes, which are easy to define and relatively cheap to administer.
The point is not to maximise the revenue from any specific tax but to extract the
maximum tax revenue at the lowest cost.

The most difficult area to forecast is technology. In the past 20 years huge tech
companies have emerged from nowhere; some, such as Facebook, have created
communities that sometimes seem like alternative worlds. The continued growth
of online trading, and the creation of electronic currencies such as Bitcoin, have
conjured up dreams of a libertarian system out of the states reach. At the same
time the widespread use of instant-communications systems such as Twitter has
created a challenge for businesses: news of a faulty product or poor handling of a
customer complaint can flash round the globe in minutes.

Globalisation, too, will remain a disruptive force. Just as governments can find
their fiscal position undermined by companies shifting domicile, individual
businesses can find their brand undermined by the emergence of new competitors,
changes in taste or even political turmoil.

All governments and companies are at the mercy of these long-term trends. In the
developed world, businesses are competing against companies from emerging
economies that may be directly state-owned or at least have a lot of government
support. Economic growth is faster in emerging markets, so that is where
multinationals increasingly want to be; if rich-country governments over-regulate
their domestic markets, they will get a progressively lower share of multinational
investment. Investors in the rich world are more likely to prosper if big companies
can take advantage of opportunities in developing countries; as the populations of
rich nations age, their pension funds need to accumulate claims on emerging
markets.

Leaders on both sides should realise that an antagonistic relationship is in

nobodys interest. Governments lose out if businesses find it hard to operate in
their country, and businesses suffer if governments are not able to prevent political
or financial turmoil. Governments need to focus on the big picturein essence,
provide a stable tax regime and an education system that produces well-qualified
knowledge workersrather than try to micromanage businesses through excessive
regulation. Companies must understand that if they push tax avoidance too far
they will alienate customers and undermine the societies in which they operate. At
a time when the rich world is struggling to generate growth, governments and
companies alike should acknowledge the fact that they are partners not enemies.